QUESTIONS ANSWERED AT Mindspace Consultants
Q. What is a Stock Option ?
One way a company can reward its employees is to give them stock options. A stock option is just - an option or a choice - to buy shares. Your options give you the opportunity to buy your company’s shares in the future at a price set today. If the stock price goes up, your options can be very valuable. If the stock price goes down, then you simply don't use your options - there's no risk to you.
Q. What are ESOPs ?
Employee Stock Options Plans (ESOPs) are Plans or Schemes for granting ownership stake in the company to employees (some or all) with a view to creating ownership attitudes and aligning their interests with the Company and its shareholders.
Q. Why is an Option valuable ?
An Option is valuable as it gives you a right (with no obligation) to purchase the shares at a pre-set price as per the vesting schedule. As a result if the Shares increase in value, you will be able to purchase the Shares at the lower Option price provided they are vested. However, if the shares decline in value after the Option is granted and vested, so long as you have not exercised the Option, you will not suffer any loss.
Q. What is an “option” in stock options ?
An option is a commitment by the company to issue shares to eligible employees on the fulfilment of all conditions mentioned in the ESOP Plan. It is however a right to you and not an obligation given to you to buy shares of the company on future dates at pre-determined prices. You have a choice to decide whether to buy the shares or not.
Q. Can ESOPs be used for improving performance ?
Yes, ESOPs help in creating a vibrant ownership culture across the entire organization. Ownership culture is one in which employees are encouraged to think and act like ‘owners’. It is expected that ESOPs will result in improvement of individual and group performance
Q. What is Grant ?
The Compensation Committee decides the eligibility criteria linked to your responsibility level and performance. Depending on the criteria set by the Compensation Committee, your individual options eligibility is arrived at and a letter is issued to that effect. This is known as Grant of Options.
Q. What is vesting ?
Vesting has two components, vesting percentage and vesting Period. When an option is granted it has a vesting percentage as in our case it is 33.33%, 33.33%, 33.34% at the end of 1 year, 2 years, 3 years from the date of grant respectively. This percentage refers to that portion of options, which you will be eligible to exercise. Vesting period is the duration when the percent of options fall due like after 12 months, 24months etc from the date of Grant. This is explained further in the following example
| Date of grant | 1st April 2010(assumed) | ||
|---|---|---|---|
| Vesting | 1st Vesting | 2nd Vesting | 3rd Vesting |
| Percentage | 33.33% | 33.33% | 33.34% |
| Duration | 12 Months | 24 Months | 36 Months |
| Vesting Dates | April 1, 2011 | April 1, 2012 | April 1, 2013 |
Q. What is Exercise?
The activity of converting the options granted to you into shares is known as Exercise of Options.
Q. What is Exercise Price ?
Exercise Price is the price that you have to pay to convert the options into shares. E.g. if the grant letter says exercise price is Rs.125/- and you want to exercise 100 shares then you have to pay Rs 12,500.
Q. What is Exercise Period ?
Exercise Price is the price that you have to pay to convert the options into shares. E.g. if the grant letter says exercise price is Rs.125/- and you want to exercise 100 shares then you have to pay Rs 12,500.
Q. If I have Stock Options, does that mean I own Shares ?
No. The Options are not actual Shares, but a right. They become Shares only when you exercise your right.